Russia's central bank (CBR) delivered surprise cut of 50bps to 7.75% on Friday

Danske Research Team Danske Bank A/S

Market movers today

The main events this week will be the Riksbank meeting this Wednesday and the Bank of Japan meeting on Thursday.
On the data front , we start the week with a very light day.
In the euro area, note that the revised inflation figures for November are also due to be released today.
Furthermore, in South Africa, the election of the new leader of the ANC may take place, which is already having a great bearing on the South African financial assets and the ZAR.

Selected market news

The final details of the US tax overhaul were revealed on Friday. The Republican tax plan cuts the corporate tax rate to 21% on a permanent basis, while offering temporary cuts to individuals. The tax plan is expected to be voted through Senate by Tuesday and signed by President Donald Trump by the end of the week, before entering into force by February. According to the Joint Committee on Taxation (JCT), the reform will raise economic growth of about 0.8% over the next ten years. However, according to the JCT's estimate (link), this will only cover about a third of the cost , which means that the reform will add at least USD1trn to the USD20trn national debt over next decade. The plan could also boost US corporate earnings by some 10% on average, with oil refiners, airlines and banks among the main beneficiaries, according to Financial Times.

Expected passage of tax plan lifts equity markets. On Thursday, concerns about the tax plan passing this year weighed on stocks as not all Republican senators had committed to supporting it . However, on Friday there seemed to be full backing for the deal with all 52 Senate Republicans in support. This lifted US stocks, with S&P rising 0.9% and the gains have carried over to Asian trading this morning.

Fitch upgrades Ireland and Portugal on Friday. Ireland was upgraded by one notch to ‘A+', while Portugal's sovereign rating was raised two not ches to ‘BBB'. Please see the Fixed Income section for details.

Russia's central bank (CBR) delivered surprise cut of 50bps to 7.75% on Friday. Together with the market and Bloomberg consensus, we unanimously expected a 25bp cut . Yet , prior to the decision we pointed out that a 50bp cut would likely mean increasing hidden pressure on the CBR ahead of the presidential election as the central bank has stayed conventionally overcautious and hawkish despite falling inflation. We expect the CBR to cut its key rate gradually to 6.75% by end-2018 (previously 7.00%). As an init ial react ion the USD/RUB spot jumped slight ly higher and rates dropped a bit . After a while, RUB was stronger against the USD and rates were almost at the same level as they were before the surprise cut . We expect high real rates to prevail in Russia in 2018, being one of the supporting factors for the RUB.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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